Massachusetts Ranks near Middle for Taxes in FY 2014

January 16, 2017

MA-Ranks-Near-Middle-for-Taxes-in-FY-2014

The U.S. Census Bureau has released its annual update of State
and
Local Government Finances, providing national data for Fiscal Year
2014. The amount of state and local taxes paid in Massachusetts as a
share of total personal income was 10.4 percent in FY 2014. By this
measure, Massachusetts had lower taxes than 19 other states and was at
the national average of 10.4 percent (see chart
below).1
Measuring taxes as a share of total
personal income allows for a meaningful comparison among states (see
“Technical Notes” at the end of this document and
MassBudget's factsheet, Adjusting for Personal Income).

Taxes are what we all pay toward—and the primary
source of
funding for—everything the people of a state choose to
provide together through government, such as: public education; roads,
bridges and public transit; police and fire protection; parks and
playgrounds; and a safety net to protect access to health care and
other supports families depend on – particularly when they
are faced with acute challenges.

TECHNICAL NOTES

The comparisons in this fact sheet present taxes as a share of
income.
This measure is used instead of per-capita taxes, because the
per-capita measure conflates two separate elements: tax rates and
incomes. This issue is most easily understood in the context of the
income tax. If one state has an income tax rate of 5 percent
and an average (taxable) income of $50,000, then the per-capita tax is
$2,500. If a state where the average (taxable) income is
lower—for example, $30,000—has a tax rate of 6
percent, then the per-capita tax in that state is $1,800. Thus, even
though tax rates are higher in the low income state (6 percent rather
than 5 percent), a per-capita ranking would show the state with the
higher tax rate as having “lower taxes.” Using
taxes as a share of income avoids this problem. For a more complete
discussion of this issue, please see the following MassBudget resource:
Adjusting for Personal Income.

The Census data and the analysis we present in this fact sheet
differ
somewhat from that presented by a commonly cited source, the Tax
Foundation. The Tax Foundation, like MassBudget, uses the basic
structure of comparing taxes as a share of income. The Tax
Foundation, however, makes a number of adjustments to the data. Among
the most important of these adjustments is their use of taxes paid by
residents of a state rather than taxes collected in the
state. This means, for example, that property taxes paid by a
Massachusetts resident on a vacation home in Maine would count as
Massachusetts taxes. While there are contexts in which such an
adjustment may be helpful, for comparing tax policies of state and
local government, it makes the most sense to look at the taxes
collected by those governments.

Finally, one important shortcoming in the state personal
income data
(compiled by the U.S. Bureau of Economic Analysis) that are used for
calculations in this fact sheet is that these data omit income derived
from capital gains. The tax data (compiled by the U.S. Census), by
contrast, include all taxes, including the taxes paid on capital gains
income. As a result, the measures presented in this fact sheet
overstate the share of economic resources paid in taxes, making public
services appear more costly to state residents than they in fact are.